European Union contemplating bigger rescue fund, says France

French Economy Minister-Christine Lagarde

French Economy Minister-Christine Lagarde

The Emergency Financial Stability Fund (EFSF) – set up by the European Union to bail out countries facing financial crisis, may be increased in size, said French Economy Minister on Friday.

In an effort that would take pressure off from the crisis stricken countries, French Minister Christine Lagarde said that the union’s ministers will also discuss buying sovereign debts of weaker member countries from the secondary market, to boost investor confidence and add liquidity.

“The increase in the European Financial Stability Facility (EFSF) is one option which we are looking at, of course”, she said while addressing a press conference.

After Greece was bailed out last May, the European Union had set up the EFSF to counter future contingencies. However, some senior EU officials have off-late been demanding to increase the size of the €440 billion fund, saying it was insufficient. A senior French government official had shot down the idea saying the size of EFSF was adequate.

Although Germany opposes an outright increase in size as well, it said a ‘comprehensive package’ to take care of the future eventualities of the single trading bloc in underway.

Though Germany is willing to debate about using the EFSF in full, it remains opposed to enhancing the fund any further, said Wolfgang Schaeuble – the German Finance Minister on Thursday.

Because of a complex loan guarantee system, the effective size of EFSF available for lending is €250 billion (£210 billion). There are worries that it may not be sufficient if largely indebted countries like Spain and Portugal wish to access it in future.

French Minister Lagarde said that in the scheduled meeting to be held on Monday, the option of buying sovereign debts from secondary markets will be discussed and if approved, will be put on the agenda for clearance in the EU leader’s summit meeting in March.

Analysts believe that after the successful auction of bonds by Portugal, Spain and Italy, investor confidence seems to be slowly returning as premium asked over German benchmark dropped and the lawmakers should seize the opportunity to make changes to improve the situation further.

“Sentiment on Europe seems to be improving after the auctions. Sentiment was extremely bearish at the start of the year and once we’ve seen some of that taken back people are starting to square positions”, said a bond trader.

However, it remains to be seen whether the positive sentiment is sustained till the EU leaders meet in March.

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